Oversea-Chinese Banking Corp OCBC - UOB Kay Hian 2016-02-18: 4Q15 ~ Realistic And Proactive Management Of Exposure To Oil & Gas Sector

Oversea-Chinese Banking Corp - UOB Kay Hian 2016-02-18: 4Q15 ~ Realistic And Proactive Management Of Exposure To Oil & Gas Sector OVERSEA-CHINESE BANKING CORP OCBC O39.SI 

Oversea-Chinese Banking Corp (OCBC SP) 4Q15: Realistic And Proactive Management Of Exposure To Oil & Gas Sector 

  • A good set of results with NIM expanding by a massive 8bp qoq and fully loaded CET-1 CAR catching up with peers at 11.8%. 
  • Management is forward looking and recognised NPLs of S$822m to the oil & gas sector. 
  • While the macro outlook is uncertain, valuation is near the trough with 2016F P/B at 0.93x and dividend yield at 4.6%. 
  • Maintain BUY. Target price: S$9.98. 


RESULTS 

  • Oversea-Chinese Banking Corporation’s (OCBC) 4Q15 net profit of S$960m was above our expectation of S$818m. 
  • Loan growth was modest at 0.4% qoq. NIM expanded by a massive 8bp qoq to 1.74% due to higher asset yield. 
  • Fee income increased 5% yoy to S$402m with healthy growth from wealth management (+6% yoy), fund management (+21% yoy) and credit cards (+21% yoy). 
  • Contributions from insurance and net trading income were better than anticipated. Great Eastern benefitted from write-back of prior years’ tax provisions, release of reserves on improved claims experience and mark-to-market gains from the narrowing of credit spreads. 
  • Operating expenses were well controlled and increased only 5.6% yoy. 
  • NPLs increased 5.8% qoq but NPL ratio was unchanged at 0.9%. The increase in NPLs was largely from Singapore and Indonesia. The proportion of NPLs not overdue is down to 28.9% from 36.1% last year, reflecting a gradual deterioration in asset quality. 
  • OCBC has caught up with CET-1 CAR at 11.8%, based on full implementation of Basel III. Quality of funding was enhanced with CASA ratio improving from 44.6% to 48.9%. 


STOCK IMPACT 


• Conservative guidance. 

  • Management expects low single-digit loan growth in 2016. Demand for loans is weak in Singapore. Some customers are looking at investing overseas in Australia, the UK and the US. Management expect single-digit growth for housing loans due to drawdown of existing loans and booking of new loans. 
  • NIM is expected to be slightly higher than the average of 1.67% in 2015. 

• Outlook uncertain. 

  • Management sees a challenging macro environment, given that business confidence is weak and financial markets remain volatile. 
  • Slower growth in China will reduce demand for commodities, which affects growth in emerging countries. 


ESSENTIALS – HIGHLIGHTS FROM RESULTS BRIEFING 


• Exposure to oil & gas. 

  • OCBC has loans of S$12.4b to the oil & gas (O&G) sector, or 6% of total loans (2014: S$13.8b). Offshore support services related to the chartering of barges, tugs, support vessels and rigs accounted for 47% of the O&G loans. About 14% or S$822m of the exposure to offshore support services is deemed vulnerable and has been restructured and recognised as NPLs. 
  • NPL ratio is 0.93%, of which 0.39% (42% of all NPLs) is related to exposure to the O&G sector. We estimate NPLs for the O&G sector has increased from S$21m last year to S$822m currently. We estimate NPL ratio for the O&G sector at 6.6%. 
  • OCBC has taken some specific provisions for exposure to the O&G sector in 2015. Management looks at expected cash flows from loans, value of collaterals based on force sale prices and outstanding balance to determine the required amount of specific provisions. 

• Exposure to China. 

  • China loans amounted to S$56b, of which only S$6b are onshore loans in China (2014: S$8b). OCBC China has exposure of S$3b to state-owned enterprises and large corporations. OCBC Wing Hang has exposure of S$3b to commercial and SMEs. Some 99% of OCBC Wing Hang’s SME loans are secured with collaterals. The balance S$50b is booked offshore as trade finance and cross border investment loans. 
  • OCBC’s NPL ratio for Greater China remained extremely healthy at 0.4%. 


EARNINGS REVISION/RISK 

  • We keep our net profit forecasts for 2016 and 2017 largely unchanged. 


VALUATION/RECOMMENDATION 


• Maintain BUY. 

  • OCBC trades at 0.93x 2016F P/B (global financial crisis trough: 0.83x) even after assuming a deterioration in asset quality of a similar magnitude to that seen during the global financial crisis. The stock provides an attractive dividend yield of 4.6%. 
  • Our target price of S$9.98 is based on 1.19x P/B, derived from the Gordon Growth Model (ROE: 9.3% (average of 2016F, 2017F and 2018F), COE: 7.8% and Growth: 0.0%). 


SHARE PRICE CATALYST 

  • Growth from regional markets in Malaysia, Indonesia and China. 
  • Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.98 Up 9.80


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